I wrote in July about the impact of the interest rate hikes applied by the Bank of England Monetary Policy Committee, both on borrowers and savers– essentially, ouch and hurrah! I fall into the latter as a mortgager.

Instead of hearing ‘woe’s me’, I am going to concentrate on the savers position here… how the ‘risk free return’ has moved investor demand away from higher-risk equities and property, and towards the guaranteed returns of cash and bonds – the journey of 14 consecutive Base Rate increases from 0.1%to 5.25% which began in December 2021 and aimed to curb [largely supply-side]inflation the reason for this dynamic.

I previously outlined the attractive savings options available to retail investors and the benefits of ‘shopping around’, rather than enduring your bank’s meagre returns, but how do things compare 6-monthson.

NS&I

Premium Bonds have long been one of the nation’s most popular savings mechanisms; offering capital preservation and potential returns. The treasury backing has the additional benefit of protecting the entire sum invested, regardless of value, rather than the £85,000 cap that is covered by the Financial Services Compensation Scheme (FSCS) for entity failure.

Good news, the average returns have increased to 4.65 percent since the last commentary, but returns are totally reliant on the monthly draw – someone I know very well, me, has never ‘won’ and therefore never met this return profile.

Each bond holder enters a free lottery each month with the prospect of winning between £25 and £1m – the odds for winning are c. 22,000 /1 but “it could be you!”

Banks& Building Societies

As you’ll be aware, the high-street banks and building societies are slow to react to rate changes and rely on the price inelastic demand of their client base; they assume that their customers won’t research and switch accounts due to the admin burden. But, hopefully you employed exactly this strategy following my previous article and found some healthy returns – inflation has fallen to 4%, so if your current cash rates exceed this level your wealth position is growing.

The rates offered have increased since the summer, though the peak may have passed, and there are several institutions offering account sat 5% and over; Leeds Building Society, Skipton Building Society and Santander all offer ‘easy access’ accounts with these rates of return. Note, access maybe restricted, and minimum investment sums may apply.

Term Deposit

‘Term Deposits’ are fixed term savings products which produce a defined rate over a specific term, typically 1, 2 or 3 years. They are generally provided by investment banks and available direct, through platform or via your financial adviser.

The preferred investment platform at SW Financial Planning is Transact due to the transparency, ease of admin and wide access to investments that it can provide. As at 23^rd January, the Term Deposits offered by this service are:

·        3.75% for monies ‘locked away’ for 3-years(previously 6.3%)

·        4.7% for monies placed for a 2-year period(previously 6.1%)

·        5.1% for 1-year deposits (previously 5.9%)

Bonds

I mentioned at the opening of this article that bonds had “returned” to the suite of options, and this remains true. However, UK 10-year bond yields have fallen from their peak and are now circa 3.9%.

If you bear in mind the compounded effect of returns [and of inflation!] these small tweaks can make a significant difference to your wealth position and related financial plan. Consider the ‘Rule of 72’ – a simplified formula that estimates how long your investment will take to double in value… At 2% it takes 36 years (72/2), and at the 5% available from ‘Term Deposit’ it takes c. 14.4 years (72/5).

Although the return profile differs across the proposals, the ‘direction of travel’ is falling cash returns throughout 2024 – the BoE is predicted to reduce the Base Rate in Q2. The negative correlation with equity investment has already [in part] generated net inflows into the markets (Q4 of2023), and the expectation is for the recovery in value to continue this year –subject to ongoing geopolitical instability.

There is likely to be a ‘cross-over point’ in which cash returns no longer offer an efficient home for longer-term savings and the capital appreciation and income offered by the stock markets and property becomes attractive – risk is once again rewarded. Of course, timing is difficult, and the crystal ball doesn’t exist. In addition, an individual’s attitude to risk and time horizon will be a key consideration.

Overall, current equity prices may represent a good buying opportunity for those with excess cash and/or maturing cash investments, so it’s worth a discussion with your Independent Financial Adviser.

Diversification is a key tool for an investor, so a mix of assets increases long-term returns and/or reduces risk.  

Rob Cowsill, IFA @ SW Financial Planning  

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